The Origins of Entrepreneurship

Entrepreneurs these days play a mythical role in American culture. They're our risk-taking adventurers. Heroes of the new economy. And the Inc. 500 -- the nation's fastest-growing privately held companies -- are entrepreneurship incarnate, themselves the stuff of myth. You want life on the leading edge? Daring leaps into the unknown? Ask the founders of Inc. 500 companies how they got their start.

Or so we figured.

We certainly posed the questions. By way of an eight-page survey and dozens of follow-up phone calls, we asked Inc. 500 CEOs to recall for us how they came to create a company. We probed their background and experience. We asked them where they got the idea for their business, how they implemented it, and of course how they financed the whole thing. Given the mythology of entrepreneurship, we expected tales of inspiration and imagination, of boldly going where no man (or woman) had gone before.

So much for expectations. Instead of swashbucklers, we found hardworking, experienced businesspeople -- people such as Jim Hanahan, Bobby N. Frost, and the many others you'll meet on the pages that follow. Instead of life on the edge, we found them pursuing their fast-growing ventures in everyday industries, from insurance admin-istration to mirror manufacture.

And instead of iconoclastic individualists, the cowboy capitalists of America's dreams, we found people enmeshed and embedded in industries, with rich networks of contacts and colleagues they could draw on to help them build a business. For most, the secret of successful entrepreneurship seemed to lie not just in individual inspiration but in knitting a dozen different interests into one cooperative endeavor. Creating a company was a matter of knowing customers, suppliers, partners, and sources of capital. It was a matter of knowing a marketplace well enough to notice tiny fault lines of change -- fault lines that would one day become sizable niches in the business landscape.

For us -- we'd better admit it -- this discovery was a little unsettling.

Like the rest of the press, we're constantly on the lookout for heroes. In our case, that means entrepreneurs who are somehow larger than life, who have seemingly inborn traits that allow them to succeed -- and sometimes fail -- in spectacular fashion. We paint verbal portraits of these men and women, hailing them as entrepreneurs of the year or the decade, holding them up as exemplars. The rocketing growth of Inc. 500 companies fits naturally into this scheme of things. We know that somewhere among each year's list will be CEOs who can tell us truly astonishing stories, stories of breathtaking risk and soul-satisfying reward.

But the unemotional numbers of the survey teach a different lesson: that these characters are the exception, not the rule, and that the creators of the Inc. 500 companies are down-to-earth, practical-minded people for whom, more often than not, building a business was simply the next logical step in a career. Jim Hanahan spent 23 years with an insurance company. Then the market shifted ever so slightly, threatening to undercut a small part of his employer's business. Hanahan decided he'd rather switch than fight and set up a company of his own to capitalize on the new environment. Other stories are similar. After 22 years in the industry, Bobby Frost started a mirror-manufacturing company to take advantage of technology that his employer was ignoring. Tom Scholl spent 13 years with Young & Rubicam in Detroit before setting up his own ad agency, seeking out clients he thought Y&R was overlooking.

Risk? Sure -- any of these businesses might have failed. Hard work? That too. "We'd all be president or whatever during the day and work in the plant at night," remembers Frost, who began his business with his brother. Entrepreneurship is never easy. But all these people, like many others we talked to, were venturing into familiar territory with well-delineated risks. If they failed, well, jobs would have been waiting for them elsewhere in their industries. And the steps they took in the earliest stages -- steps you'll hear more about in subsequent sections -- kept the chances of failure to a minimum.

The inescapable conclusion: entrepreneurs are made, not born. Made by their experience. Made by the changing marketplaces in which they find themselves. Granted, maybe there's some quirk of personality, some subtlety of background, that separates these Inc. 500 CEOs from their erstwhile counterparts who kept climbing the corporate ladders. But we don't know how to describe that difference, and we doubt it's the same for everyone. What is the same -- what crops up over and over in the stories we heard -- is what you might call situational entrepreneurship. As individuals, the people aren't so different from the rest of us. But they were working in situations where, thanks to their experience, they knew exactly how to go about building a business. They were smart enough to spot the opportunity and knowledgeable enough to take the right first steps.

It's always tempting to glamorize the dramatic adventurers in the business world; like movie stars and major-league ball players they lend a little pizzazz to everything they touch. But maybe it's not so discouraging to find that entrepreneurship is a more mundane matter than it's sometimes portrayed. As the stories and statistics of our survey show, you don't need to be a person of mythical proportions to be very, very successful in building a company.

TRADE SKILLS

Entrepreneurial Experience

Did your parents run their own business while you were growing up?

Yes 33% No 67%

Did you ever start a serious business as a child or student?

Yes 37% No 63%

Did you start any companies other than your Inc. 500 company?

Yes 41% No 59%

Sources of Skills

What was the single most important source of your skills and abilities as a company builder?

46% Work or professional experience in an industry

23 Family background and childhood experience

9 The experience of starting other businesses

22 All other responses

What was the critical time in your live for acquiring these skills and abilities?

28% Before age 21

72 As an adult

Jim Benedict had 15 teenagers working for him -- shoveling snow off shopping-center roofs in his hometown of Buffalo -- by the time he was 10 years old. By age 27 he had started three more companies, including the advertising and marketing agency he now owns.

You can find these entrepreneurial wunderkinder if you look hard enough, men and women with company building apparently in their blood. Depending on how you count, anywhere from one-sixth to one-third of our sample are these Born Entrepreneurs (see page 3).

But if you want a more typical case history, consider Jim Hanahan. Or maybe Mark S. Smith.

Hanahan, 56, runs a third-party administration company, as it's known, which manages self-insured health plans for corporate clients. You wouldn't have pegged him for an entrepreneur: no childhood businesses, no other start-ups, just a 23-year career with multibillion-dollar Connecticut General Life Insurance Co. (now CIGNA) in the staid old insurance industry. Smith, 41, worked in Southern Railways Inc.'s marketing department and wound up with the wonderfully bureaucratic title of manager of intermodal pricing. If Southern hadn't wanted to transfer him from Washington, D.C., to Roanoke, Va., he might still be there, instead of running his own transportation service company out of Overland, Kans.

What makes Hanahan and Smith typical? Just this: two-thirds of our respondents grew up in households where their parents worked for wages rather than running their own businesses. Nearly as many undertook no entrepreneurial ventures as children. Three-fifths started no companies other than the one that landed them on the Inc. 500. Almost all of the respondents, in fact, did just what most people do: they went to school, got jobs, took up a particular line of work. Ask them how important for their current role were the skills they acquired while working, and a whopping 85% check "critically important" or "somewhat important." Ask them to cite the single most important source of their abilities as a company builder, and at least twice as many point to "work or professional experience in an industry" as to any other answer.

There's a theory, dubbed trade skill, that argues for the importance of early exposure to entrepreneurship. "Usually the person who successfully starts and runs a small business," write the people who invented the concept, "either had a parent or close relative who had a business or . . . they had significant business experience themselves before the age of 18." For about a quarter of our respondents, that theory seems to hold true. Like snow-shoveler Jim Benedict, they point to family background and childhood experience as the key source of their talents, and report that they had the most important skills and abilities for company building by the time they turned 21. And doubtless a much larger fraction of our CEOs come from entrepreneurial backgrounds than you'd find in the population as a whole.

But if the trade skill theory doesn't describe you, don't despair. It doesn't describe Hanahan, Smith, or most of the other Inc. 500 founders either. For the majority of respondents, what made the difference between continuing a career and starting a company wasn't any formative childhood experience. It was the simple fact of spotting -- and developing -- a new idea.

BORN ENTREPRENEURS

If you wanted to prove that entrepreneurial instincts are genetic in origin, you might trot out Robert G. Barbour as Exhibit A. "The question growing up was never whether I'd be in business for myself, it was what that business would be," says Barbour, founder of Windline Amanet.

Some people do seem almost born to the calling. Thirty-seven percent of our respondents started at least one serious business in their youth. Nearly half of those started two or more. And 41% started at least one business as adults other than their Inc. 500 company, with a quarter of that group starting three or more companies.

Barbour, 42, qualifies on all counts. In college he netted some $150,000 selling inventions ranging from a "slurp gun" (for trapping tropical fish) to a patented alarm system. Then came more serious company building. Sunrise Leather, a manufacturer of belts, vests, and handbags, reached $700,000 in sales before Barbour cashed out. Two companies later Barbour was designing and selling equipment and technology used in the art glass and decorative ceramics industries. After that he started a laboratory to grow synthetic emeralds, and he imported natural emeralds. Finally his interest in yachting led to the creation of Windline Marine, a manufacturer of boating accessories. Several years later he started an industrial and aerospace-components division called Amanet. Today Windline Amanet is doing $3 million in sales. -- Elizabeth Conlin

THE IDEA

Where Good Ideas Come From

43% Got idea while working in same industry or profession

15 Saw someone else trying it, figured I could do better

11 Saw unfilled niche in consumer marketplace

7 Did systematic search for business opportunities

5 Brainstorm, can't really explain it

3 Got idea from hobby or avocational interest

16 All other

How to explain where Great Business Ideas come from? Some of our respondents didn't try; they checked the box on the questionnaire that said "Brainstorm; can't really explain it."

But more common than the out-of-the-blue inspirations were the explicable ones, the ideas that caught their creators by surprise but in retrospect seem pretty logical. James Ake's liquid plant-food business was chugging along at a modest speed until, caught in the middle of a rush order, he realized his automatic bottle-fillers couldn't do the job fast enough and so designed a new machine. Today Ake's Electronic Liquid Fillers Inc. sells $11 million worth of filling equipment.

The mythology of entrepreneurship celebrates such serendipity, propagating an image of the lone company-inventor suddenly flashing on the idea of a lifetime -- and sometimes it happens just that way.

Typically, though, the idea for a fast-growing business appears in much more pedestrian fashion. The structure of a marketplace shifts, maybe ever so slightly. A new niche opens up. And all at once people like the aforementioned Hanahan or Smith, people who may never have expected to become entrepreneurs, are out on their own and amazed by their own success.

Market shifts come in many guises. For Hanahan, the key factor was a federal court ruling allowing corporations to set up self-funded health-insurance plans, a murky legal area until 1978. That "opened the floodgates," he says, in that it created a market for specialists in setting up and administering such plans. Hanahan's St. Petersburg, Fla., firm, with the self-defining name of WHP, First in Employee Benefits Inc., was among the first in the marketplace. Smith also was the beneficiary of a change in the regulatory environment. Railroad deregulation created a niche for companies that could negotiate deals with the rail lines and with truckers, then sell packages of door-to-door transportation services to shippers. Smith's $15-million Hub City Kansas City Terminals Inc. grew 783% between 1983 and 1987, thus making last year's 500 list.

Sometimes it's technology that shakes up a marketplace. Computer companies, for an obvious example, can get started by taking advantage of ever cheaper processing power. Solution Systems Inc. founder Neil Kleeman, 41, spent about $300,000 on a computer equivalent to his former employer's million-dollar machine, and was able to lure customers away with lower prices (see "Your Basic Good Career Move," page 7).

But technology crops up in less likely places as well. When we heard of Consolidated Glass & Mirror Corp., in Galax, Va., a mirror and glass fabricator for the home-furniture industry, we thought we'd found the quintessential low-tech, rural business. Our mistake.

"A lot of technology came on the market about 1980 that hadn't been there," says cofounder Bobby N. Frost, 51, explaining in a rich southern accent where he got the idea to start the company. "It's all computer numerical control equipment, and it's revolutionized the manufacture of glass and mirrors for furniture." Frost, then a superintendent for another company in the industry, had worked in glass and mirror fabricating for 22 years. When he learned his employer wasn't really interested in the new technology, he and his brother John set up shop with state-of-the-art machinery. Eight years later they're up to more than 600 employees and $36 million in sales.

UNLIKELY SOURCES

If you have a lemon, goes the saying, make lemonade. And if you're facing a problem, turn it into the idea for an Inc. 500 company.

* Ministering to the sick. Jean Griswold, wife of a Presbyterian pastor, tried to find volunteers to help elderly parishioners with errands and household tasks. Her success was sporadic, until she realized that the old folks were willing to pay for help. She then began hiring students to do the work. From these modest beginnings Special Care Inc. has grown to a $10-million, multistate operation supplying full- and part-time help to the elderly and infirm.

* Reinventing the wheelchair. Allan Thieme, a plumber for 12 years, was visiting Mexico with his wife, who uses a wheelchair, and found the chair offputting as well as awkward -- "People wouldn't get near us; they just stared." For the next six months he worked in his spare time to build a light, motorized, three-wheeled scooter that performs the same function as a wheelchair but doesn't carry the stigma. Now, Amigo Inc. sells $10 million worth of the vehicles annually, which -- according to an owner who is now a company salesperson -- "bring a sense of self-respect and independence" as well as mobility.

* Blackmailed into business. While still in his twenties, Philip Walkenshaw tried repeatedly to start an enterprise he called Tartan Laird Ltd., selling family histories and tartans to people of Scottish descent. But he couldn't find the capital. Finally Ralph Jansen, a former boss of Walkenshaw's, said he'd invest if Walkenshaw first started an agency to handle the advertising for the publishing company Jansen worked for. Reluctantly Walkenshaw agreed, running the tiny ad agency out of his back pocket while developing his Tartan business plan. The latter, alas, went nowhere -- so Walkenshaw finally turned his attention to the agency, landing Montgomery Ward as his first big client. Today Walkenshaw's Townsend Agency Ltd. is doing nearly $15 million in billings.

FIRST STEPS

Helping Hands

Who helped you develop your idea?

52% Potential customers

51 Spouse

50 Partners

44 Colleagues in same industry

29 Potential suppliers

26 Professional advisers (lawyers, consultants, etc.)

19 Potential backers

Time Line

How long did it take to start your Inc. 500 company, from the original idea to the beginning of operations?

29% A matter of weeks

37 A few months

28 Six months to a year

9 More than a year

Start-Up Ambitions

What was your original intent for your company?

12% Planned to start small and stay small

27 Planned to grow slowly

29 Didn't plan, just wanted to get started

32 Planned to grow as fast as possible

What was your company like when it first began operations?

50% "Regular" business but small

48 Informal operations in home, garage, etc.

2 All systems in place for fast growth

When we planned the questionnaire for our Inc. 500 chief executives, we figured we'd write a here's-how-to-get-started section of the article. So we asked the respondents: who helped you develop the idea? Who helped you turn it into a business? What, exactly, did you do first? We also asked them how long it took to get the company operating and whether they planned on fast growth or on any sort of growth at all. When we began browsing through the responses, we realized our textbook-style approach was in trouble.

For starters, there was the head-down, do-it-don't-talk-about-it minority, the one-eighth or so who checked "didn't really discuss the idea with anyone" and a like number who said "didn't really get help from anyone." Hard to recommend that lone-wolf model, though it sure worked for some. For the others, the difficulty was in teasing out patterns. First steps? Except for developing a business plan (58% had a casual one, 21% a formal workup), fewer than half the respondents checked any one answer on the questionnaire. Only 45% consulted a lawyer. Only 31% met with bankers. Only 25% developed marketing materials.

As for initial plans, roughly equal numbers of respondents planned to grow slowly, planned to grow fast, and didn't plan at all. What should we make of that?

Worse, the Inc. 500 CEOs weren't always happy with what they did do. More than a third, for instance, said that they went out and found partners as one of their first steps, and fully half reported that they got help from partners in developing and implementing their idea. But later, when we asked what had gone wrong with their plans, "trouble with partners" was the single most common refrain. "Have no partners," advised one, mincing no words.

And yet -- there was a surprise or two buried in the developing-the-idea section of the questionnaire. We expected "spouse" to rate high as a source of help; we were right. We also expected "potential backers" and "professional advisers" (lawyers, accountants, etc.) to score high. We were wrong. Instead, respondents told us they got help from potential customers and colleagues in the same industry; nearly a third cited potential suppliers. What gave them their competitive edge, we discovered, was that they had the contacts and knowledge necessary to weave familiar threads into new patterns.

Take Jim Hanahan again, founder of the company that administers self-insured health plans. After 23 years with Connecticut General, Hanahan knew how much his target customers were paying in insurance premiums. He knew how much their rates had gone up, and how much, on average, went to pay benefits. He had the contacts to arrange for caps on potential customers' liabilities through Lloyds of London.

His early discussions with prospects were simple. Imagine you bought in with us today, he'd say, and we'll track your premiums and potential savings over the next 12 months. His first full year in operation generated only $100,000 in revenues. But five years later he was up to $4.5 million.

Others told similar stories -- of knowing an industry and the people in it well enough to utilize suppliers effectively and to create exactly what customers were looking for at a particular time.

Neil Kleeman, of Solution Systems Inc., watched one of his previous employer's customers increase their computer usage to the point where it made sense for them to set up an in-house system. That was when he approached them and offered to sell them equivalent data-processing services for 30% less than they'd been paying.

Robert W. Howe, CEO of Atlantic Data Services Inc. (ADS) in Quincy, Mass., was working for a bank-owned data-processing center when bank deregulation began to take hold. Observing that banks were looking for more and more customized software, he began making contacts both with software vendors (who could supply programs tailored to each customer's needs) and with potential customers. When he went out on his own he had two clients ready to sign up.

To our minds, it took surprisingly little time to set up an Inc. 500 company, in most cases a few months or less. What it did take was intimate knowledge of a market. The first steps followed logically from that.

MONEY

How Much Money?

Amount you estimated you'd need to launch your company:

Less than $50,000:

35% $10,000-$49,999

34 Less than $10,000

More than $50,000:

12% $50,000-$99,999

10 $100,000-$249,000

9 More than $250,000

Amount you actually needed:

50% About what I figured

26 More than I figured

14 Much, much more than I figured

10 Less than I figured

Where the Money Came From

Most important sources of capital (% of respondents relying mainly or significantly on this source):

75% Own resources (cash)

35 Mortgage of own assets

33 Corporate loan from bank

29 Partner's assets

23 Personal loan from bank

20 Parents or other relative

Who Kept the Equity?

Amount of equity that the founder and family now hold in company:

39% All

18 75%-99%

22 50%-74%

21 Less than 50%

Anyone who hasn't done it knows how to raise money for a start-up. You work out detailed financial plans, figure out how much you'll need, then double it. You take your plans around to friends, relatives, other potential investors. You stay away from banks; banks don't fund start-ups.

According to the experience of Inc. 500 CEOs, that view is wrong, wrong, and wrong again.

Detailed financial plans? Not here; only 15% had full workups, while 41% relied on informal estimates. Another 37% said they didn't make financial plans at all, just wanted to start with as much money as they could lay their hands on.

In most cases, moreover, they didn't begin with much. More than a third of our respondents started their fast-growth businesses with less than $10,000. More than another third started with between $10,000 and $50,000.

Naïve, you say. Babes in the woods. Nope -- we thought of that possibility, and asked them how much they actually needed. "Less than I figured," said 10%. "About what I figured," said another 50%. Nor was there any statistical correlation between low initial estimates and needing more later.

The money wasn't hard to find: usually it was their own. Three-quarters checked "own resources" as a significant or most important source of capital; varying percentages also checked "mortgaging own assets," "personal loans from bank," and the like. When they did get an initial infusion of capital from the outside, it was much more likely to come from a bank (in the form of a corporate loan) than from a friend, relative, or equity investor. And the decisive factor, in most cases, was once again that network. "Personal relationships or business contacts" and "extensive experience in industry" were by far the most frequently cited reasons for success in raising money.

So: how do you start a multimillion-dollar business on a small nest egg? Our respondents make it sound easy.

Bill from Day One. Robert Howe of ADS got a $30,000 loan from a friend, added in some of his own and his partner's money, and set up shop as a custom programming service for banks. Since he had his clients lined up, he had a revenue stream; and in six months was able to get a $10,000 short-term loan from the bank. Jim Hanahan, similarly, kept his expenses to a bare-bones minimum -- less than $50,000 -- until he had signed up some customers. He didn't borrow any money until it was time for him to buy a computer.

Develop a network of suppliers. Tom Scholl, who runs an advertising agency in Detroit, found that starting his business took more than the $10,000 he originally planned, particularly since a couple of seemingly sure customers backed out. What kept him alive was help from his friends: one who ran a recording studio, another with a broadcast production business, a third with a music company, all of them willing to work for Scholl, on spec if necessary, to help him develop his business along with their own. Jim Brett, cofounder of Brett Aqualine Inc., a California manufacturer of equipment for portable spas, took the network concept one step farther. Like Scholl he lined up support from suppliers, all of whom knew him from the industry. Then he went to one of his prime customers and explained that he needed a letter of credit in order to produce the goods. That, plus supplier credit, allowed him to begin.

Don't be shy of banks. Banks may always be skittish about start-ups, probably with good reason. But they'll often lend against hard assets to people they know and trust, even in a business's early stages. Bobby Frost, of Consolidated Glass & Mirror, estimates he and his brother got about $150,000 in bank loans in his company's start-up days, all of it secured by land, building, or equipment. All told, about one-third of our respondents got significant start-up money in the form of corporate loans from banks.

GOING TO EXTREMES

The typical Inc. 500 CEO started with a modest amount of money, most of it his or her own. Then there are the atypical start-ups:

* Thinnest shoestring. Bob Rodriguez, then 20, deposited a $50 check in the bank to start his sales promotion company. It bounced. Oh, well. Rodriguez and his partner had seven or eight credit cards, used them to run up about $10,000 in debt, then lost them all. Regularly overdrawn at the bank, they survived only because an assistant manager there believed they'd succeed. Finally they landed a big account -- Eastern Airlines Inc. Fortunately, Eastern accounted for only 4% of Rodriguez's sales when the airline filed for Chapter 11 protection.

* Most unusual source of capital. Frederick Baker was a regional manager for C.P.S. Cablevision in 1975 when company owner James Peno fired him. Eighteen months later Peno called and asked Baker to take on some installation contracts that C.P.S. couldn't handle. Peno even agreed to lease equipment to his former employee and to countersign a $1,700 loan. With that capital Baker started his own company; 10 years later he bought Peno out.

* Hanging in there the longest. James Read figured he could build a better screening plant -- a piece of heavy equipment designed to sift stone and earth -- than anything on the market. So in 1977 he sold his construction company's assets for $200,000 and proceeded to spend it all. Three years later he had been turned down by banks and venture capitalists, had mortgaged his house, borrowed money from friends, and spent his father's life savings -- running through $600,000 in all. But his fledgling company was still struggling: by 1982 it was $300,000 in debt, including $50,000 in back taxes. Read scraped together $20,000 and could find no more -- until, two days before the IRS's deadline, a customer plunked down an order and a check for $58,000. The immediate crisis over, Read watched The Read Corp. grow to current sales of $45 million.

* Biggest spender. Mark Ain raised $45,000 to develop his idea for a computerized tracking system for hourly employees. Then he sold $471,000 worth of stock to finance a prototype system and $608,000 worth to finance production. Once in production, he ran out of money and raised $200,000 more. Finally he realized he needed a national network to in-stall and service his systems, and he brought in two venture capital firms for a total of $800,000. His secrets? "People say I'm one of the best raisers of capital they've ever come in contact with," says an immodest Ain. "I'd set a date for closing [each] offering, then I'd tell everyone, 'It looks like we're oversubscribed.' " They came, they saw, they invested -- and Ain's company, Kronos Inc., is finally making money.

NETWORKING

Why It Worked

Success of company is mainly attributable to:

88% Exceptional execution of an ordinary idea

12 An unusual or extraordinary idea

Surviving Start-Up

Most important source of support for founder and family before company began generating income was:

43% Own resources, such as savings

20 Salary drawn from company's capital

17 Continued work at other income-producing activity

10 Spouse's income

2 Support from parents and relatives

8 Other

How nice it would be if all our questions -- about background and business ideas, about getting started and raising money -- led to some simple lessons: How to Create an Inc. 500 company.

Alas, we found no magic key. Did you think you hit upon an extraordinary idea for a business? we asked them. No -- only 12% thought so. Was it the carefulness of your planning? No again -- a sizable fraction said they didn't pl